MARY A. ROBERT, SIEGEL-ROBERT, INTERVENOR v. UNITED STATES OF AMERICA,
Docket: 03-1603
Court: Court of Appeals for the Eighth Circuit; April 29, 2004; Federal Appellate Court
Mary A. Robert appealed the district court's summary judgment against her in her effort to quash four IRS summonses. The Court of Appeals for the Eighth Circuit found that the summonses were issued following improper ex parte communications between the IRS Appeals Office and Examination Division, violating the Internal Revenue Service Restructuring and Reform Act of 1998, which mandates independence of the Appeals Office and prohibits such communications. However, the court concluded that these communications did not bar enforcement of the summonses, affirming the district court's judgment.
The case involved Ms. Robert, who, as trustee of a marital trust, owned a significant number of shares in Siegel-Robert, Inc. In 1998, she transferred shares to her children, securing the transaction with promissory notes treated as non-recourse debt and claiming the transfers were related party sales under I.R.C. § 267. Additionally, she made further transfers to relatives, classifying them as gifts. Ms. Robert reported minority share values of $21.73 and $23.67 on her 1998 and 1999 gift tax returns, respectively, based on a private appraisal.
In 2000, an IRS audit of her gift tax returns ensued, wherein the assigned examiner disagreed with her valuations, prompting an IRS appraisal by Financial Analyst Ernest Gruenfeld, who determined higher minority share values of $55.52 and $44.17 for the same years. Based on this appraisal, the IRS assessed Ms. Robert with a significant tax deficiency of approximately $34 million for 1998 and $233,000 for 1999. The examiner, Paul Latt, sent Ms. Robert a 'thirty-day letter' proposing these deficiencies, which included his examination report and Gruenfeld’s appraisal, noting an unaccounted decrease in outstanding shares that he did not factor into his valuation.
On April 2, 2001, Ms. Robert contested IRS findings and sought an appeals conference, leading to the assignment of IRS Appeals Officer Daniel Mannion on May 18, 2001. Mannion had prior involvement with Ms. Robert's deceased husband’s gift tax case concerning Siegel-Robert stock valuation and was familiar with relevant court opinions on fair value determination. On August 12, 2001, Mannion deemed Mr. Gruenfeld's appraisal inadequate for not adhering to established methodologies. He communicated this inadequacy and shared Ms. Robert's protest with Mr. Latt for further appraisal review.
On September 10, 2001, Ms. Robert's attorney sought a meeting with Mannion, who withheld details about his prior ex parte discussions with Latt. During the October 3 meeting, Mannion and Ms. Robert's attorneys discussed the case and raised concerns about a one million share reduction in Siegel-Robert stock, which the attorneys attributed to a marital trust's cash redemption for diversification. Mannion suggested the potential for new gift tax issues and recommended an external appraisal but did not disclose his earlier communications with Latt or intentions for future ex parte discussions.
Following the meeting, Mannion informed Latt of the new developments regarding the stock reduction and provided Latt with the attorneys' written critique of Gruenfeld's appraisal. Mannion subsequently referred the new information to Latt's supervisor, Chris Mezines, indicating it might relate to ongoing bargain sale/gift issues. On October 29, 2001, Latt requested further information about the stock reduction from Ms. Robert's attorneys, citing the Appeals Office's interest. In December 2001, Latt informed them of a private appraiser's involvement and reiterated Mannion's view of Gruenfeld's appraisal inadequacy. Ms. Robert's attorneys contested Latt's authority, citing the Appeals Office's jurisdiction and Mannion's prior commitment to contacting them in January for resolution.
On January 11, 2002, Mr. Latt communicated with Ms. Robert's attorneys, emphasizing that Mr. Mannion remained in charge of the case, and noted that the examination division would assist Mr. Mannion in gathering financial data and securing a private appraisal, as an in-house appraisal was deemed insufficient for IRS purposes. Following this, Ms. Robert's attorneys arranged a meeting with Mr. Mannion and his supervisor Chris Roth on January 23, 2002, to address ex parte communications involving Mr. Mannion, Mr. Latt, and Mr. Mezines. During this meeting, Mr. Mannion acknowledged that Ms. Robert had effectively contested the IRS's valuation prepared by Mr. Gruenfeld.
Another meeting occurred on January 29, 2002, with Mr. Mannion, Mr. Roth, and other IRS representatives present. Ms. Robert's attorneys proposed remedies for the ex parte communications, suggesting a new appeals officer or a statutory notice of deficiency; Mr. Roth indicated he would coordinate a response. Subsequently, it was decided that a new examiner, John Crowe, would conduct a fresh audit rather than assign a new appeals officer.
Mr. Crowe then requested financial records for a third-party appraisal of Siegel-Robert stock and issued four summonses directed at Siegel-Robert and its executives. On March 14, 2002, Ms. Robert sought to quash these summonses, arguing they were a result of the earlier ex parte communications and a failure of independent review, claiming they were issued in bad faith and would constitute an abuse of court process. She requested discovery and a hearing.
On June 10, 2002, the government filed a motion for summary judgment to enforce the summonses, providing affidavits from IRS officials. Ms. Robert contended that these affidavits revealed multiple undisclosed ex parte communications, including discussions on August 13, October 3, and October 4, 2001, as well as other interactions between IRS personnel and a private appraisal firm, which she had not previously known about.
On July 2, 2002, Ms. Robert filed a motion under Fed. R. Civ. P. 56(f) to either strike the government's summary judgment motion or obtain an extension for discovery. The district court denied her motion on November 14, 2002, and mandated her response to the government's motion. On January 9, 2003, the court granted the government's summary judgment, noting Ms. Robert failed to provide case authority supporting her claim that IRS internal regulations against ex parte communications invalidate subsequent summonses for information. The court concluded that enforcing the summonses did not abuse the court's process nor indicate IRS bad faith.
The standard of review for the district court's summary enforcement, and refusal to quash an IRS summons, is de novo, while the denial or limitation of discovery is reviewed for abuse of discretion. The IRS's argument that the ex parte communications were permissible is not pursued, as Congress aimed to protect taxpayers through the Restructuring Act by enhancing the independence of the IRS Appeals Office, including restricting certain ex parte communications. The plan mandated by the Restructuring Act emphasizes the need for an independent appeals function and prohibits communications that could compromise this independence. Revenue Procedure 2000-43, issued under this Act, outlines permissible ex parte communications, differentiating between ministerial and substantive matters, with specific examples of acceptable communications that do not compromise the independence of appeals officers.
Some communications in this case were substantive rather than merely administrative, indicating that they should not have occurred ex parte according to the Restructuring Act and IRS procedures. Specifically, Mr. Mannion improperly expressed his views on Mr. Gruenfeld's appraisal to Messrs. Latt and Mezines without including Ms. Robert's attorneys in the discussion. He also shared a critique and additional information from Ms. Robert’s attorneys with the Examination Division without their involvement and recommended hiring an outside appraiser for the Siegel-Robert stock, actions that compromised his independence.
The situation is exacerbated by the IRS's delay in disclosing these communications until litigation began and its unwillingness to acknowledge the impropriety of its ex parte communications, reflecting an institutional failure to adhere to the restrictions. Despite these concerns, the summonses will be enforced since Congress did not limit the IRS's summons power as a remedy for ex parte violations, and the IRS has established an administrative remedy for such violations. The Supreme Court advises caution against creating barriers to IRS summons enforcement and found no evidence of improper purpose or bad faith in the issuance of the summonses.
According to the Supreme Court in *United States v. Powell*, a court should not enforce an IRS summons if it would result in an abuse of the court's process, particularly if the summons was issued for an improper purpose, such as harassment or coercion. Courts can evaluate the good faith of the IRS investigation and are not restricted to predefined categories of improper purposes, allowing for consideration of new situations that may indicate potential abuse of authority or judicial process.
The Court established a framework in Powell for assessing the IRS's good faith in enforcing summonses, requiring the IRS to demonstrate: [1] a legitimate purpose for the investigation; [2] relevance of the inquiry to that purpose; [3] that the information requested is not already in the IRS's possession; and [4] adherence to the necessary administrative procedures per the Code. If the IRS meets these criteria, the burden shifts to the challenger, who must either refute the IRS's demonstration of good faith or show that enforcing the summons would constitute an abuse of court process. The Supreme Court has emphasized that courts should be cautious in obstructing IRS summonses aimed at investigating taxpayer liabilities, interpreting congressional intent to favor the IRS's authority unless explicitly prohibited or countered by significant policies. Thus, the IRS's burden to establish a prima facie case is minimal, while the challenger's burden is substantial, requiring proof of the IRS's bad faith or abandonment of civil investigative purpose. Ms. Robert's challenge centers on good faith and abuse of process, asserting that a broad prohibition against abuse allows for quashing a summons due to the IRS violating laws or rules. However, precedent indicates that violations do not automatically invalidate summonses; rather, the court must consider the severity of the violation, the IRS's good faith, and any harm caused. Ms. Robert argues that the IRS's actions constituted an improper purpose linked to ex parte communications. The Gilbert C. Swanson Foundation case reinforces the importance of adhering to statutory and administrative regulations governing IRS summonses while rejecting a blanket rule against enforcing summonses due to rule violations, favoring a circumstantial evaluation instead.
The violation of ex parte communication in this case is deemed serious, breaching both the intent of the Restructuring Act and its mandate to the Commissioner, rather than being a mere infringement of a non-binding IRS guideline. Congress has given the Commissioner the authority to reorganize the IRS and ensure adherence to the ex parte communication restrictions, but did not specify remedies for violations. Consequently, courts typically do not impose remedies when Congress has not provided them. The IRS has established administrative processes to address such violations, suggesting that quashing the current summonses may not be necessary.
Regarding good faith, there is no evidence indicating that the communications or the summonses were intended for any purpose other than accurately determining Ms. Robert's tax liability. Despite the improper nature of the ex parte communications, there are no allegations of ulterior motives or coercive actions by the IRS. Ms. Robert’s argument regarding the good faith of the IRS relies on her interpretation of the Appeals Office's role post-Restructuring Act; she views it as limited to affirming or reversing the IRS’s positions. However, this interpretation is rejected, as the Restructuring Act does not prevent the Appeals Office from referring matters back to the Examination Division if necessary.
There is no modification to existing criteria or procedures under the Restructuring Act, which reinforces the guidelines in Section 8.2.1.2 of the Internal Revenue Manual (IRM) and confirms the Appeals Office's role as the IRS's settlement arm. If a case is not ready for Appeals, it may be returned for further development, but such referrals should not occur on an ex parte basis. Legislative history indicates that Congress opted against a comprehensive overhaul of the Appeals Office, rejecting proposals for an independent Office of Appeals and restrictions on communication with the originating function. The Restructuring Act only prohibits ex parte communications that might compromise the independence of Appeals officers and does not prevent Appeals from examining new issues or returning cases for further examination. The IRS has concluded that Appeals should maintain a degree of independence and flexibility, allowing it to return cases, raise new issues, and seek input from the originating function without compromising its mission. In the case of Ms. Robert, while the referral for further development was proper, the ex parte nature of the referral was noted. However, there is no evidence of improper purpose or bad faith in the summonses, and thus, the violations of the ex parte restriction did not harm Ms. Robert, leading to the decision not to quash the summonses.
Discovery is not universally required in IRS summons actions, and the summary nature of these proceedings generally limits discovery. While some discovery may be warranted, taxpayers should not be compelled to allege specific facts without access to necessary information. Courts have recognized that the information demonstrating improper motives typically lies with the government, and limited discovery should be available to taxpayers to balance the process. In cases where a taxpayer shows substantial preliminary evidence of potential abuse of process, discovery may be justified. Ms. Robert presented conclusive evidence of improper ex parte communications by the IRS but failed to show that these communications led to illegitimate summonses or reflected bad faith from the IRS. Her claim for discovery was based on her lack of knowledge about these communications, but the government’s disclosures did not imply any improper motive; rather, they indicated a desire to accurately assess the value of Siegel-Robert stock. Consequently, the district court did not abuse its discretion in denying her discovery request. The judgment of the district court is affirmed. Additionally, in a related case concerning minority shareholders' appraisal, it was established that fair value determinations should not consider marketability or minority status, distinguishing it from fair market value considerations. The IRS's estate tax appraisals were deemed irrelevant in this context.
